Running an agency in a bankrupt country: How Dentsu is coping amid Sri Lanka crisis

Sri Lanka is facing its worst economic crisis since independence from Britain in 1948. It’s the first country in Asia-Pacific in more than two decades to default on foreign debt. Its president is scrambling to lock in a bailout package worth between US$2 billion and US$3 billion to stabilise the bruised economy. 

In July, food inflation crossed record highs of 90%. It’s soaring even higher now. Being cash-strapped in such a time means life has become a long queue for its 22 million strong population—a queue for food, fuel, medicines, and daily necessities amid rampant power cuts and sweltering heat. All this while earning lesser than the week prior and “adjusting” basic meals. Struggling citizens have formed groups on social media to share regular updates about fuel supply and queues at gas stations.

A recently released Situation Report by the UN has stark findings: Nearly three in four households are curbing their meals due to a loss in purchasing power, and 56,000 children under the age of five have been plunged into acute medical malnutrition. The report adds: Seven out of 10 households do not have access to safe drinking water, and many schools are shut because fuel shortage limits the students’ and teachers’ mobility.

At a time of dire poverty and uncertainty, running a business, especially a creative agency which thrives on keeping its creative juices flowing, is a mammoth task. Campaign Asia-Pacific speaks to Mohenesh Chamith Buthgumwa, vice president of communications at Dentsu Sri Lanka to get a reality check on what it means to run a creative business in a bankrupt country.

Mohenesh Chamith Buthgumwa, Dentsu

Currency depreciation, increasing import bans, devastation of tourism sector, crippling fuel and food shortages. The headlines from Sri Lanka are bad, is the reality worse?

It’s an unprecedented crisis of hyperinflation, power outages, fuel and gas shortages. All this has a significant impact on daily life. The fuel crisis has severely hampered consumer mobility. From around May 2022, people's savings started depleting as investments and savings were being pumped into daily purchases and just about trying to stay afloat.

Johns Hopkins reported a 124% inflation in June—significantly higher than that found by the UN. Despite massive price hikes, people are willing to spend even more on necessities (such as gas), resulting in spiralling inflation in the country. Day workers and blue-collar workers are under severe strain, their livelihoods are jeopardised.

Source: Ceylon Petroleum Corporation/BBC

Talk about the impact this crisis has had on the ad industry.

Power outages have a direct impact on the advertising industry, both traditional and digital. This year's media inflation will rise by another 1.5% by the end of the year due to increased demand from advertisers and a reduced supply of eyeballs due to daily power outages in the market.

Sri Lanka is a mobile-first market, and when power outages occur, mobile connectivity is also disrupted. Digital consumption increased because of news and other factors such as messaging apps driving consumers to the medium, but it suffered as a result of rising dollar rates and a lack of forex in the market to transact with foreign digital partners smoothly.

The global agencies operating locally are surviving because of their clout with the bigger global partner platforms when it comes to payment settlement. However, the smaller and medium-sized agencies, particularly those focused primarily on performance marketing are struggling. It’s a difficult time for them.

Source: Sri Lankan government/BBC

How are clients reacting to this situation?

Economy teethers on the brink. It’s no longer business as usual.

Many products in the market are currently experiencing significant supply chain problems. The value of advertising has increased by 3% from H1 of 2021. This is a result of the requirement to strengthen consumer pull as prices for products rise gradually. The non-FMCG category's reduced advertising due to supply chain issues has resulted in CPGs spending the most on advertising.

Small and medium-sized advertisers have been figuratively pushed aside due to a lack of budgets, while tier-one advertisers scramble to acquire additional inventory to generate consumer pull. The state of the overall advertising industry is not good, the fourth quarter is expected to move at a much slower pace across all tiers as budgets shrink.

Clutter levels on TV (accounting for close to 90% of the spend) are increasing as tactical messaging and price communications take the lead. Thus, advertisers are fighting hard for a share of voice with shorter duration messaging, smaller budgets and also competing with the larger advertisers for visibility. This is further creating an artificial category of heat—much like the spiralling inflation seen in the economy.

A recent Kepios report revealed that roughly 38% of Sri Lanka’s population is on social media and between 2021 and 2022 the number of users increased by 300,000 (nearly 4%). What does this digital wave mean for creativity and content?

The frustrations of citizens because of the disastrous situation did result in a wide range of creative and diverse viewpoints being expressed online.

Creativity that brings people together and encourages participation has taken over screen time in both online and offline mediums. To achieve the desired outcome, the youth of the country understood the importance of participation—across the country, people are more connected, spending more time online, always updated through various groups on social media about critical updates.

Massive spikes in usage were seen on messaging platforms and VOD. A crisis creates a significant opportunity for growth. This time around, it is a new generation that’s armed with a mobile device, one that creates innovative content along the way.

In your opinion, what are the best business strategies for agencies to steer themselves out of this situation.

In an economic crisis, the best strategy is to identify the right clients and industries to target, over-service your current clients, and educate them about the importance of protecting their marketing budgets.

The best way to get an agency through a rough patch is to increase sales rather than cut costs. Clients and agencies that do well during this period may emerge even stronger post-crisis.

Cutting advertising costs is a common reaction among business leaders because this is the low-hanging fruit. However, most business analysts agree that this is not the best strategy. As competitors exit the market, metrics such as cost-per-click and cost-per-impression can fall, making traffic more accessible.

Elaborate on these steps that can help agencies stay afloat.

A crisis is an unprecedented opportunity to carry out necessary changes—one that should not be missed. Smaller advertising agencies with fewer clients and smaller budgets tend to be less impacted right now. Despite the risks, small and mid-sized agencies have this golden chance to compete with higher-priced agencies for new clients.

Agencies have this unique prospect to assist clients in adjust their marketing strategy and flip the crisis into an opportunity for both. The macroeconomic trends may have a greater or lesser impact on your clients' businesses, depending on the products and services they provide. But if your clients are having trouble, it's even more reason for them to invest in a new marketing strategy, which would be an additional source of billable revenue for the agency.

You could also concentrate on new business opportunities in markets or segments that have been less affected by the economic downturn. Increase your agency's customer base by pitching for new clients that are more resilient to the economic downturn than others. Maybe look for new markets outside of Sri Lanka.

Growing your agency's sales is the most secure way to come out of an economic crisis. But it's also a good time to double- and triple-check unnecessary expenses. Slash administrative costs that are weighing you down and not absolutely necessary, right size your agency workforce with short-term contracts for new hires and don't touch the small perks that your employees enjoy and appreciate.

Use this time wisely to redesign, rethink future plans and invest in more training and development to upscale talent.

If you're feeling particularly confident, consider some power moves. You may be able to recruit the best talent from less-prepared competitors, or you may be able to make an offer to acquire their agencies.

When are you eyeing recovery?

The Sri Lankan economy began to lose momentum well before the pandemic. According to the Asian Development Bank, Sri Lanka's economic growth will slow to 2.4% in 2022 and slightly improve to 2.5% in 2023. Because of the economic and political uncertainty that has ensued since April this year, these figures are most likely over-estimates.

Sri Lanka has been suffering from a severe lack of foreign exchange to repay its international debt and pay for essential imports. Just recently, imports of over 300 products have been temporarily halted, this decision will significantly impact the advertising industry even further. Taking all of the aforementioned factors into account, as well as the ongoing global recession, there is light at the end of the tunnel, but recovery will take at least 12 to 18 months.